Sorry for the late reply. Had a Time Machine backup issue, lol.
Some of the other posters have mentioned key points already, but I'll put in my thoughts and hopefully clarify as best as possible.
I've read over similar issues/complaints about Time Machine and iCloud for a few years, and I, like many, have things I wished worked a certain way. Some do, some don't.
The first important thing to clarify is the difference between iCloud and iCloud Drive and how they function. Many people use both terms interchangeably, but to avoid confusion, don't. iCloud is just the main synching and storage service Apple offers for your files. Depending on your settings, this will function in specific ways.
Your iCloud Drive is just a specific location (think of it as if you had an external drive connected with whatever files you have inside it) where you store your chosen files. These files will take up physical storage space on your Mac's internal storage. This is where "Optimize Mac Storage" within "System Settings" plays a key role. If you have "optimize" turned on, then for files, apps, etc., that are inside iCloud Drive, they will be like an alias/shortcut to the actual files that are fully stored on Apple's iCloud servers for you.
For those files/apps that you recently have opened and/or previewed, the full file/app is now taking the full physical space on your internal Mac's drive. After some time (time is determined by your computer system, NOT you) of not opening/previewing these said files, they will become an alias/shortcut once more, in turn reducing the file size and conserving your internal Mac's storage space. That's the key point of "Optimize". You can always choose what is fully on your Mac's drive and what is only on iCloud servers. That's what the "cloud" symbol is all about. This is referred to as "Download" or "Remove Download". There's a faster way to download or remove download from entire folders and any sub-folders with all related files, rather than one at a time.
Again, don't get confused thinking iCloud Drive's contents are fully and physically present on your Mac's internal drive. No "cloud" icon means they are, the "cloud" icon means they aren't fully there, but are stored on the iCloud servers. Most importantly is to be aware that this is all about keeping those files/apps synced with your other Apple devices. Don't think of this as a backup, because that is not technically what it is. It's like when people use the Trash can as a temporary storage place. Don't do that; it leads to confusion and deleting stuff you may not have wanted to. Hopefully, you wouldn't do that with an actual physical trash can. That's not its purpose.
Now, Time Machine. This is your actual backup (in a sort). As you may have read elsewhere, it's a good idea to have 3-4 backups on separate devices and locations if your files are that important. I keep all my files pretty well organized, and yes, I have a system I'm comfortable with and works for me. The Time Machine backup is something you should do regularly, but from experience, whenever done, don't go around moving or deleting stuff. Trust me, I've made that mistake!
Be aware that if you delete any file/app within your iCloud Drive from any device, it will delete it from ALL devices. This is why so many have restated to not think of iCloud Drive as a backup because it is not. It is just another drive that is synced with your other devices.